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January 3, 2017

14th Finance Commission Recommendations- Civil Services

The 14th Finance Commission (FFC) was constituted by the orders of President on 2 January 2013 in accordance to the Article 280 of the Constitution of India. The commission submitted its report with recommendations to the President Pranab Mukherjee on 15 December 2014.The commission was formed to suggest recommendations for the period from 1 April 2015 to 31 March 2020.

Some Major Recommendations of 14th FC - Exam View Point:

1.The share of states in the net proceeds of the shareable Central taxes should be 42%.This is 10%points higher than the recommendation of 13th Finance Commission.

2.Revenue deficit to be progressively reduced and eliminated.

3.Fiscal deficit to be reduced to 3% of the GDP by 2017–18.

4.A target of 62% of GDP for the combined debt of centre and states.

5.The Medium Term Fiscal Plan(MTFP)should be reformed and made the statement of commitment rather than a statement of intent.

6.FRBM Act need to be amended to mention the nature of shocks which shall require targets relaxation.

7.Both centre and states should conclude 'Grand Bargain' to implement the model Goods and Services Act(GST).

8.Initiatives to reduce the number of Central Sponsored Schemes(CSS)and to restore the predominance of formula based plan grants.

9.States need to address the problem of losses in the power sector in time bound manner.

10. TAX DEVOLUTION TO BE BASED ON AREA, POPULATION, DEMOGRAPHY, INCOME DISTANCE & FOREST COVER- Highest weight of 50 per cent is given to distance from the highest per capita income district, followed by population (1971 census) at 17.5 per cent, demography (2011 census) at 10 per cent, area at 15 per cent and forest cover at 7.5 per cent

11. CENTRE'S FISCAL AND REVENUE DEFICITS -Fiscal deficit should come down to 3.6 per cent of GDP in 2015-16 from projected 4.1 per cent in 2014-15 and then 3 per cent in following year and kept at that for three more years. Not different from existing roadmap, though the present time frame ends in 2016-17. Wants revenue deficit to come down from 2.9 per cent in FY15 to 2.56 per cent in FY16 and then progressively reduce to 0.93 per cent by 2019-20

12. STATES' FISCAL AND REVENUE DEFICITS- Fiscal deficit should be at 2.76 per cent in FY16, to come down to 2.74 per cent by FY20 though it would increase in between. To be revenue surplus in all these years

13. CENTRE'S DEBT-To come down from 45.4 per cent of GDP in FY15 to 43.6 per cent in FY16 and then progressively should reduce to 36.3 per cent by FY20

14. STATES' DEBT- Projected to increase from 21.90 per cent in FY16 progressively to 22.38 per cent in FY20

15. NATIONAL SMALL SAVING FUND (NSSF)- States be taken away from operation of NSSF with effect from next financial year

16. CONSOLIDATED SINKING FUND- Examine the possibility of setting up of CST for amortisation of debt of the Union govt

17. RAIL TARIFF AUTHORITY- Replace the advisory body with a statutory body, through necessary amendments to the Railways Act, 1989.

18. ADVERTISEMENT TAX- States should empower local bodies to impose this tax to augment their revenues

19. BOOST FOR STATES' SHARE IN NET PROCEEDS OF TAX REVENUES- The commission has recommended states' share in net proceeds of tax revenues be 42 per cent, a huge jump from the 32 per cent recommend by the 13th Finance Commission, the largest change ever in the percentage of devolution. As compared to total devolutions in 2014-15, total devolution of states in 2015-16 will increase by over 45 per cent

20. TAX DEVOLUTION BE PRIMARY ROUTE OF TRANSFER OF RESOURCES- The panel has recommended tax devolution be the primary route of transfer of resources to the states; the government has accepted the recommendations keeping in mind the spirit of National Institution for Transforming India (NITI)

21. GRANTS FOR LOCAL BODIES BE BASED ON 2011 POPULATION- The commission has recommended distribution of grants to states for local bodies using 2011 population data. Grants will be divided into two broad categories on the basis of rural and urban population - (i) a grant constituting gram panchayats and (ii) a grant constituting municipal bodies

22. GRANTS BE IN TWO PARTS - BASIC AND PERFORMANCE -The panel has recommended the grants to states for local bodies be in two parts, a basic grant and a performance grant. The ratio of basic to performance grant is 90:10 with respect to panchayats and 80:20 in the case of municipalities.

23. GRANTS TO GRAM PANCHAYATS & MUNICIPALITIES- The total grants recommended by the commission are Rs 2,87,436 crore for a five-year period from April 1, 2015 to March 31, 2020. Of this, Rs 2,00,292.20 crore will be given to panchayats and Rs 87,143.80 crore to municipalities. The transfers for financial year 2015-16 will be Rs 29,988 crore

24. STATES' SHARE IN DISASTER RELIEF SHOULD STAY UNCHANGED- The Commission has said, with regard to disaster relief, the percentage share of states will continue to be as before and follow the existing mechanism. This will be to the tune of Rs 55,097 crore. After implementation of GST, the recommendations of the panel on disaster relief would be implemented

25. POST-DEVOLUTION REVENUE DEFICIT GRANTS FOR STATES- The panel has recommended 'post-devolution revenue deficit grants' for a total of Rs 1,94,821 crore on account of expenditure requirements of the states, tax devolution and revenue mobilisation capacity of the states. These grants will be given to 11 states.

26. SOME CENTRAL SCHEMES BE DE-LINKED- Eight centrally sponsored schemes will be delinked from support from the Centre. Various centrally sponsored schemes will now see a change in sharing pattern, with states sharing a higher fiscal responsibility for implementing the schemes

27. OTHER RECOMMENDATIONS- The Finance Commission has also made recommendations on cooperative federalism, GST, fiscal consolidation roadmap, pricing of public utilities and public sector undertakings.

28. Some Important Points

1) Finance Commission came into existence in 1951. It was setup under Article-280 of Indian Constitution. It will be setup by President. K. C. Neogy is the first Chairman.

2) It defines the financial relations between the centre and the state.

3) Tenure- 5 Years

4) Its functions : a) Distribution of net proceeds of taxes between Center and the States, to be divided as per their respective contributions to the taxes. b) Determine factors governing Grants-in Aid to the states and the magnitude of the same. c) To make recommendations to president as to the measures needed to augment the Fund of a State to supplement the resources of the panchayats and municipalities in the state on the basis of the recommendations made by the Finance Commission of the state. d) any other matter related to it by the president in the interest of sound finance